The Impact of Interest Rates on Deal Structure — How to Adjust Deal Terms to Accommodate Higher Capital Costs

The Impact of Interest Rates on Deal Structure — How to Adjust Deal Terms to Accommodate Higher Capital Costs - Sunbelt Business Brokers

You’re ready to sell your business, but you’re not sure anyone is ready to buy your company because of interest rates. Certainly, interest rates play a key role in companies being bought and sold and impact the structure of a deal.

Higher interest rates increase the cost of borrowing money, which many companies do to finance all or a portion of a buy. That’s led to a decrease in the number of buyers looking to acquire a company, but there still are plenty of transactions taking place, according to Lexology, a global platform for business analysis.

With interest rates high, you might rethink selling your business, waiting for more buyers to enter the market. But the interest rate isn’t the only factor affecting the buying and selling of companies. As the owner of a small- or medium-sized business, you have your reasons for wanting to exit the business.

You don’t have to tie the timing of selling your business to rising or falling interest rates. In either environment, Sunbelt Business Brokers can help you sell your business when you’re ready to sell.

While interest rates will affect the structure of a deal, Sunbelt Business Brokers can show you how to adjust the terms of your deal to get your business sold.

The Impact of Interest Rates on Deals

Higher interest rates directly impact buyers, making borrowing more expensive and lowering investors’ returns. The higher interest rates also increase the risk of buyers not being able to repay their loans, so lenders have increased their requirements. More requirements mean more due diligence, leading to longer approval times and more denials.

This also means buyers have to scrutinize their purchases better, leading to higher costs for due diligence and lower valuations. Additionally, as a seller, higher interest rates likely have raised your capital costs, and the higher interest rate also lowers the valuation of future returns, known as the discount rate.

All of this can result in deals taking longer to close or falling apart.

Adjusting Terms to Accommodate Higher Capital Costs

If you are set on selling your business, higher interest rates can make finding a buyer more challenging but not impossible for you. And there are options for buyers to finance the deal with less money from a lender or no bank loan at all.

A buyer can purchase your business with deferred payments. This lowers the amount the buyer pays up front and allows the buyer to make payments over time. The method can help you maintain your asking price when selling your business but lacks security, putting you behind the bank and others to collect if the buyer’s business goes south.

Tying payments to your company continuing to successfully meet performance goals after the close is another way for buyers to pay less at closing and help you get the value you seek from selling your business.

Sunbelt Business Brokers has a business valuation tool that can help you better understand what your company is worth. Like the previous method, this one exposes you to more risk than you might want when selling your business.

Seller financing is becoming more common and is a way to get the deal done that benefits the buyer and you. You might be able to charge an interest rate as high as 10 percent, set the terms of the loan, maintain equity in your company and not run it, and get the deal done quickly.

Thinking About Selling Your Business?

Selling your business while interest rates are high can seem challenging, but that is where our team at Sunbelt Business Brokers come into play. Our experienced business brokers can show you how to adjust deal terms because of high capital costs in order to get your business sold.

Whether you’re ready to sell or are just considering doing so, contact us today or use our free business valuation calculator to get an idea of what your business is worth.